Does My Tax Preparer Understand My Business? - Part I
Are you sure that your tax preparer is claiming all the business tax deductions you are entitled to?
A recent article "The Ins and Outs of Day-Care Provider Taxes, Part I" is a helpful tool that can help educate your tax preparer about the unique tax rules affecting family child care providers.
The article is directed at tax preparers and was published in the EA Journal, the leading publication of the National Association of Enrolled Agents. An Enrolled Agent is someone who has passed an IRS test and can represent taxpayers who are audited by the IRS. Enrolled Agents are more likely to understand family child care providers than CPAs.
The article covers:
Claiming income on Schedule C
When to file Form 1099 and when not to
How to handle bartering and why the value of these services must be included as income
Why interest on bank accounts should not be reported as income on Schedule C
Why the home should always be depreciated
And more
The article has a particularly good explanation on the Time-Space Percentage. It includes an excellent worksheet that shows how to calculate this percentage when you have regular use rooms and exclusive use rooms. This is an area where, unfortunately, some tax professionals do not know how this unique rule benefits providers. Therefore, if you have both types of rooms, show this article to your tax preparer to make sure he/she calculates it correctly.
My feedback
I had a few disagreements with the article. It says, “Use caution when including areas of the garage. This area is not considered a living area so it is not included in the stated square footage of the home in public records. If the garage is added to the space used (the numerator), the square footage of the garage must also be added to the square footage of the home (the denominator). Parking the car in the garage is not considered business use of the home. Using the garage as a children’s play area is business use.”
However, the IRS Child Care Profit Audit Guide, on page 22 says, “Another common error occurs in cases where the taxpayer is using the garage in the business. You must be sure that the square footage of the garage is added to the denominator (total home space) as well as the numerator (business usage space).”
The article says that the garage is not part of the square footage of the home, but then says if it’s counted as business use it must be included as part of the total square footage. So the second part of the sentence is consistent with the Audit Guide, but I believe that the first part is confusing.
I encourage all providers to always include the garage (even a detached garage) as part of the total square footage of their home. Most providers use their garage on a regular basis in their business.
Also, I have not heard before that the use of a car is not considered business use of a garage. There is no IRS authority supporting this position. It seems to me that when a car is used for business purposes, parking it in a garage does create some business use of the space. In the same way that the storing of yard tools, bicycles, garbage can, etc, would also create some business use. The article implies that only children playing in the garage would create business use.
clearly allowed a providerto count a garage are regular use in her business even though children wereprohibited from playing in there according to licensing rules.
Secondly, the article say that home improvements must be depreciated over 39 years. However, providers may be able to deduct a home improvement in one year if they qualify for the Safe Harbor for Small Taxpayers rule.
Tom Copeland - www.tomcopelandblog.com
Image credit: https://www.forbes.com/sites/kellyphillipserb/2019/02/07/how-to-find-the-perfect-tax-preparer/?sh=486d803016f9
My Family Child Care Tax Companion is a tool for providers who use tax preparers to ensure that they do not make any major mistakes on your tax return.
